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Human Resource Services
PwC Saratoga




Managing people in
a changing world*
Key trends in human capital
A global perspec...
Human Resource Services
                                                            Saratoga




Contents




Preface     ...
Human Resource Services
PwC Saratoga




Preface
Maximising the value of organisational resources has never been more chal...
Human Resource Services
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Human Resource Services
PwC Saratoga




Background and methodology
PricewaterhouseCoopers Saratoga, part of the Human Res...
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        Argentina           China           Czech                             Italy                    South
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Human Resource Services
PwC Saratoga




1. Human capital impact
2005 and 2006 stand out as years when the burgeoning econ...
Human Resource Services
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Human Resource Services
       PwC Saratoga




                                                              Figure 5: Re...
Human Resource Services
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5,000
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Human Resource Services
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Human Resource Services
PwC Saratoga




                                  Outsourcing and offshoring trends              ...
Human Resource Services
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Human Resource Services
PwC Saratoga




‘CEOs say that                   Management stretch is an important aspect
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Human Resource Services
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Key Trends 2008 Human Capital
Key Trends 2008 Human Capital
Key Trends 2008 Human Capital
Key Trends 2008 Human Capital
Key Trends 2008 Human Capital
Key Trends 2008 Human Capital
Key Trends 2008 Human Capital
Key Trends 2008 Human Capital
Key Trends 2008 Human Capital
Key Trends 2008 Human Capital
Key Trends 2008 Human Capital
Key Trends 2008 Human Capital
Key Trends 2008 Human Capital
Key Trends 2008 Human Capital
Key Trends 2008 Human Capital
Key Trends 2008 Human Capital
Key Trends 2008 Human Capital
Key Trends 2008 Human Capital
Key Trends 2008 Human Capital
Key Trends 2008 Human Capital
Key Trends 2008 Human Capital
Key Trends 2008 Human Capital
Key Trends 2008 Human Capital
Key Trends 2008 Human Capital
Key Trends 2008 Human Capital
Key Trends 2008 Human Capital
Key Trends 2008 Human Capital
Key Trends 2008 Human Capital
Key Trends 2008 Human Capital
Key Trends 2008 Human Capital
Key Trends 2008 Human Capital
Key Trends 2008 Human Capital
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Key Trends 2008 Human Capital

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Key trends in Human capital in 2008

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  1. 1. Human Resource Services PwC Saratoga Managing people in a changing world* Key trends in human capital A global perspective – 2008
  2. 2. Human Resource Services Saratoga Contents Preface 2 Executive summary 3 Background and methodology 4 1. Human capital impact 6 • Financial performance • Added-value performance • Productivity performance • Commercial metrics • Outsourcing and offshoring • Mergers and acquisitions 2. Human capital drivers 16 • Leadership • Engagement • Talent management and learning • Innovation 3. Human capital foundations 24 • Demographics • Diversity • Work-life balance • Wellness 4. Human capital futures 32 • Corporate reporting • Risk management • Established generic metrics 5. The HR function 35 • HR function • HR reputation • Shared services Conclusion 40 Acknowledgements 41 References 42 Contact us 44 Key trends in human capital 1
  3. 3. Human Resource Services PwC Saratoga Preface Maximising the value of organisational resources has never been more challenging. Now, more than ever is the time for innovation and creativity. Keeping a watchful eye on the turbulent world economy and responding effectively is critical to sustainable business success. This third edition of Key trends in human For ease of reference, the report data is capital builds on the critical issues that we organised within five key headings containing have identified in earlier years, and introduces specific trends that are closely interrelated. new developments that we consider should In summary, they are: be of major interest to all executives involved Human capital impact – these constitute in people management. major bottom line trends which have The work is primarily based on data collected measurable financial results. They all contain from PricewaterhouseCoopers Saratoga’s critical elements of human capital input and human capital database across Europe, Asia, reflect the real impact people are having on Africa and the Americas. It is supplemented by the organisation. secondary sources, such as findings from the Human capital drivers – we have identified PricewaterhouseCoopers 10th and 11th global a limited number of trends which will CEO surveys of 1,150 CEOs, and representing largely influence the impact people have industry sectors including banking, financial on their organisation. They are the real services, manufacturing, telecommunications, drivers of performance. chemicals, IT, utilities and retail. While the public sector is represented by a relatively small Human capital foundations – these are sample of organisations, we are confident from background people trends, often affected our work in this area that the majority of the by demographic or social movements that Richard Phelps, Global lead partner, trends identified are highly relevant to their are already influencing both the way an current challenges. organisation manages its people and the way Human Resource Management, those people respond to that management as PricewaterhouseCoopers Whilst this year’s report builds upon earlier part of today’s sustainability agenda. publications, it includes further supplementary information from a wide range of additional Human capital futures – we have identified regions. Reporting on developments in these a limited number of issues that are clearly economies demonstrates the increasing global affecting organisational thinking and are likely appetite for human capital information as a to grow in importance. tool to help promote sustainable economic performance. The HR function – we have once again reviewed the emerging structures and roles Unlike many other human capital reports, of the function which is an ongoing issue in we place particular focus upon financial results human capital management. and their direct relationship with human capital performance. It is our view that all human Above all, we intend this report to provide capital policies and processes should directly practical guidance to human capital relate to the sustainable business performance practitioners. We are concerned not with and financial objectives of the organisation. providing a merely encyclopaedic analysis of It is the only way people will be given the human capital activity across the globe, but recognition and status that their contribution with identifying a limited number of key issues deserves. In the past, human capital issues that will have a significant effect upon an have all too often been treated as ‘resource organisation’s future success, in order to absorbing’, rather than ‘value adding’, business provide insight into where your management investments. However, they require the attention should focus. application of the same disciplines to assess We look forward to sharing the results of the value of their return as any other investment this report with you, our future human capital decision. Increasingly, CEOs, shareholders, studies, and to continuing our dialogue on analysts and others are likely to demand more this topic. rigorous financial assessments. Richard Phelps 2 Key trends in human capital
  4. 4. Human Resource Services Saratoga Executive summary A prime finding of this 2008 report is the growing recognition on a global basis of the undeniably critical role that human capital plays in the sustainability of organisations in all sectors of business and community related activity. As the globalisation of business and networks continue to gather momentum, all economies, Demographic trends, diversity, work-life balance and wellness are having a real influence ‘There are a limited whatever level of maturity they have reached, are recognising their dependence on the people upon the sustainability strategies for people management in organisations. Successful number of human capital aspects of their strategies to leverage success. organisations will claim to gain advantage from drivers that will have the This report raises a range of issues, key positive, proactive policies related to all these trends, suggesting that progressive employment most significant influence messages and implications for all those responsible for human capital management practices correlate with successful enterprise. Others may claim that success simply makes upon organisational in the immediate future. In summary they are as follows: it easier to introduce such policies. performance in the Human capital impact – there is a new Human capital futures – we have identified years immediately a limited number of organisational activities global business landscape. Asia, Central & Eastern Europe, Brazil, Indonesia, Mexico and that have strong human capital content and ahead. They constitute Turkey are challenging the mature economies a broader organisational context. Corporate reporting and risk management fall into this leadership, engagement, for dominance. The US and Western Europe are re-establishing a competitive place in the category. Both assume a higher level of human capital prominence as the importance of human talent management and new order, looking for low cost solutions in their outsourcing and offshoring initiatives, capital in overall organisational performance learning and innovation’ gains higher recognition. CEOs, when developing consolidation in mergers and acknowledging that the people agenda is one acquisitions (M&A) activity, and recognising of their main personal objectives, are beginning the need for greater agility in order to respond to include it in the context of other business rapidly to changing customer demands and actions. In PwC’s recent global survey of sudden, unanticipated, financial crises. 1,150 CEOs across 50 countries, 89% of People are critical. However, for Western CEOs agreed that the people agenda is one Europe, levels of productivity, agility of of their top priorities and 67% agreed that it response and innovation continue to lag is where their time would be best spent. behind the US, which itself is struggling The HR function – the future of the function to adapt to the new world. still remains a matter for speculation. With the Human capital drivers – there are a limited establishment of shared service operations to number of human capital drivers that will handle increasing amounts of the traditional have the most significant influence upon transactional HR role, the future of the function organisational performance in the years relies increasingly upon its ability to establish immediately ahead. They constitute leadership, a high level of strategic business presence. To engagement, talent management and learning date it has largely failed to do so. The concept and innovation. They are closely interrelated and of business partnership, as championed by the inability to excel and compete in any single David Ulrich and other HR opinion leaders, is one will result in failure in them all. There is no proving challenging to implement successfully. hard evidence that Western Europe or the US is Furthermore, the growing recognition of the making the progress required in any of these importance of people to sustainable business drivers. There has been much talk, many words success by the majority of surveyed CEOs, written and substantial sums of money spent. suggests that they themselves may be playing To date, the results are largely still awaited. a far more active role in human capital management than previously. Only 43% of Human capital foundations – there are a range CEOs globally in the latest PwC survey agree of people trends of varying intensity in global that their HR function is equipped to handle economies that reflect social and political changes required to compete for talent. pressures as much as organisational policy. Key trends in human capital 3
  5. 5. Human Resource Services PwC Saratoga Background and methodology PricewaterhouseCoopers Saratoga, part of the Human Resource Services advisory practice, has an established track record in providing global human capital benchmarking and measurement studies, and has one of the world’s largest HR consulting businesses and most robust databases of human capital performance measures. ‘The trends discussed PwC Saratoga work with 40% of FTSE 100 and Fortune 500 companies and consider Background to key trends 2008 This report tracks key human capital trends in this report are highly intelligent measurement to be fundamental to performance improvement. Benchmarks through 2006 to early 2008. However, as we relevant to all executives cover a broad spectrum including country produce this report we are highly conscious of the major financial disturbances that are involved in the shaping workforce, size and sector. Data is collected according to strict definitions ensuring occurring across the globe affecting all major business markets. We have therefore studied and management of resultant benchmarks reflect a robust, like-for-like comparison. the early responses to these new challenges human capital within In January 2005 we produced the first Key and commented upon the impacts we believe they are likely to have upon human capital their organisation’ trends in human capital report. It was based on policies and activities in the immediate future. human capital measurement and benchmarking As with our previous studies, the trends work in 2003 and early 2004 in Europe and identified are not always present in every the USA. In May 2006 we revisited the subject, region; sometimes the economies are moving confirming most of the trends we had identified at different speeds and many are at different earlier, indicating at the same time further stages of maturity. In some cases, insufficient important human capital movements which evidence is available for clients to collate appeared to be developing. At the same time the data against the strict definitions and we extended coverage to Asia Pacific and standards we apply. South Africa. Analyses were based primarily upon our own measurement work but also The trends discussed in this report are highly embraced other research conducted by PwC relevant to all executives involved in the shaping or in other organisations that had produced and management of human capital within their relevant papers. The key objectives of our organisation, and those who are responsible for reports have been to identify those trends that prioritising the allocation of resources to key would dominate the human capital agenda for issues. We welcome the continued discussion some years ahead. and dialogue some of our observations and conclusions may provoke. Figure 1a: European database – participants by industry sector Banking 11.6% Insurance 2.8% Life & Pensions 1.5% Finance 5.1% Chemicals 7.2% Eng/Mfg 24.9% IT & Electronics 20.1% Public Sector 2.9% Retail & Leisure 7.7% Services 6.2% Telecoms 5.8% Utilities 4.4% 4 Key trends in human capital 1.8
  6. 6. 0 Argentina China Czech Italy South Republic Germany India Japan Sweden Turkey US Korea 2005 2007 2010 2020 2050 Human Resource Services Saratoga China Banking Czech Republic Germany Retail and leisure India Italy Insurance Japan Turkey Life and pensions US South Korea Public Sector Sweden Argentina Methodology This briefing is based upon an all-industry Other finance 0 10 20 30 40 50 60 70 80 90 median. Commercial region, size and sector PwC Saratoga is renowned globally for its can have a major influence upon many metrics work on human capital benchmarking and so where appropriate we include tables that measurement. For some 20 years, it has worked Services detail results by region and sector that reveal with organisations to gather data upon an the strong structural and cultural differences increasing range of closely defined quantitative that continue to pervade European and other and qualitative measures. The information is Chemicals markets. There is solid coverage across interpreted and integrated into the business European nations and the US, including planning process and relevant balanced comparisons for Central and Eastern Europe scorecards. The only results received from Telecoms (C&E Europe). Nearly a quarter of participants organisations that are included in its database are multinational operators, many producing conform exactly to its prescribed definitions. data for multiple countries or business units. We are therefore highly confident that all its data IT and electronics is consistent and usable for comparison and Within this sample, illustrated below, the benchmarking purposes. PwC Saratoga uses an following industry sectors are covered: evidence based consulting approach to human banking, insurance, life and pensions, finance, Utilities capital issues and, where possible, our work is chemicals, engineering/manufacturing, public underpinned by data and trends throughout. sector, IT and electronics, retail and leisure, services, telecoms and utilities. Eng/Mfg This report is based on PwC Saratoga’s global database of human capital performance metrics and other secondary sources. This data has been collected by client organisations 0 10 undertaking measurement and benchmarking % Total female em projects and also from other PwC Saratoga research activities. % Female (Mana % Female (Profes Figure 1b: US database – participants by industry sector Banking 5.4% Insurance 10.1% Finance 4.7% Healthcare 20.2% Chemicals 5.1% Eng/Mfg 11.9% IT & Electronics 7.2% Public Sector 11.6% Retail & Leisure 4.3% Services 4.3% Telecoms 7.6% Utilities 7.6% Key trends in human capital 5
  7. 7. Human Resource Services PwC Saratoga 1. Human capital impact 2005 and 2006 stand out as years when the burgeoning economies of Asia and Central & Eastern Europe consolidated their positions of high revenue growth outpacing the more mature Western economies and offering huge opportunities for inward investment. These years also witnessed the rapid advance of other emerging economies, including Brazil, Russia, Indonesia, Mexico and Turkey which are joining the ranks of high growth centres. The early signs of economic slowdown in than Western Europe (2.0%) and C&E Europe 2004 and 2005, affecting the US and Western (11.0%), and holding a profit per FTE (18.5%) Europe, were partially rebutted in 2006 but in higher than European competitors (12.9%). the latter half of 2007 presents further evidence The complete picture is illustrated in figure 2. of an economic slowdown. Growth throughout The traditional productivity gap formula 2006 gave way in early 2007 to uncertainty (the Conference Board defines productivity and turbulence, with the US in particular here as GDP – see page 11 for further details) encountering waves of internally generated between the US and Europe narrowed during financial pressures. 2005 and 2006 but continued to be significant. US productivity growth in 2006 reduced to Financial performance trends 1.9% from 3.1% in 2005, whilst the enlarged Throughout 2006 and through to mid 2007, European Union registered overall productivity the US remained competitively well placed, growth of 2.8%, bolstered by the new entrants maintaining a higher growth of revenue per Full (EU12), registering 4.6%.1 Time Employee (FTE) (15.2% from 2005 to 2006) Figure 2: Financial trends 2002-2006 % change % change % change 2002 2003 2004 2005 2006 02-06 04-05 05-06 Revenue per FTE (€) UK 129,024 135,888 142,008 146,054 153,194 18.7% 2.8% 4.9% C&E Europe 32,408 51,298 58,796 81,464 90,441 179.1% 38.6% 11.0% Western Europe 145,766 157,187 169,546 173,434 176,955 21.4% 2.3% 2.0% All Europe 134,074 154,315 166,916 172,031 176,298 31.5% 3.1% 2.5% US 218,217 233,332 260,543 228,937 263,689 20.8% -12.1% 15.2% Costs per FTE (€) UK 126,071 134,500 138,999 142,061 147,095 16.7% 2.2% 3.5% C&E Europe 31,837 51,512 55,122 76,384 85,860 169.7% 38.6% 12.4% Western Europe 142,353 153,838 164,152 166,768 168,376 18.3% 1.6% 1.0% All Europe 130,067 150,499 161,989 165,747 167,570 28.8% 2.3% 1.1% US 162,941 171,140 181,481 162,233 169,452 4.0% -10.6% 4.4% Profit per FTE (€) UK 3,112 3,248 3,495 4,062 4,519 45.2% 16.2% 11.2% C&E Europe 302 612 719 2,123 2,724 802.0% 195.3% 28.3% Western Europe 3,696 4,238 4,827 5,586 6,283 70.0% 15.7% 12.5% All Europe 2,926 4,045 4,700 5,520 6,232 113.0% 17.4% 12.9% US 24,631 35,625 55,128 31,571 37,396 51.8% -42.7% 18.5% Source: PwC Saratoga data 6 Key trends in human capital 1 Source: The Conference Board and Groningen Growth and Development Centre, Total Economy Database, 2008
  8. 8. Human Resource Services Saratoga Over the broad range of human capital financial measures, the US demonstrates impressive high cost social benefits and to maintain their core business base. France and Germany are ‘Nations with comparative performance, placing itself across the mature business economies as best heavily affected, Sweden and Finland are under pressure, whilst the UK has to-date preserved institutionalised social positioned to respond to new and emerging higher levels of workforce flexibility than the benefit programmes competitive challenges. As indicated in previous reports, the US continues to respond more majority of its Western European counterparts. are generally struggling It is predicted by PwC that by 2050 the BRIC quickly and robustly to downturn situations than its European counterparts, possibly due to economies (Brazil, Russia, India and China) plus to gain higher flexibility its highly entrepreneurial culture and heritage. others, such as Indonesia, Mexico and Turkey will outstrip those of the current G7 (US, Japan, to compete against The importance of agility and flexibility in Germany, UK, France, Italy and Canada). aggressive global work force policies and practices becomes Foreign direct investment into these countries increasingly relevant as economies face a continues at a pace likely to continue as they competition’ turbulent period.2 Nations with institutionalised offer lower cost resources, increasingly highly social benefit programmes are generally skilled workforces and, an increasingly struggling to gain higher flexibility to compete aspirational consumer base. against aggressive global competition, to afford Figure 3: Profit per FTE 2003-2006 (€) Figure 4: Profit per FTE (US) (UK, C&E Europe, W Europe & all Europe) 2003-2006 (€) 7,000 7,000 60,000 60,000 300,000 300,000 6,000 6,000 50,000 250,000 50,000 250,000 5,000 5,000 40,000 40,000 200,000 200,000 4,000 4,000 30,000 30,000 150,000 150,000 3,000 3,000 20,000 20,000 100,000 100,000 2,000 2,000 1,000 10,000 10,000 50,000 50,000 1,000 0 0 0 0 0 0 2003 2003 2004 2004 2005 2005 2006 2006 2003 2003 2004 2004 2005 2005 2006 2006 2003 2003 2004 2004 2005 2005 2006 2006 UK UK Western Europe Western Europe US US UK UK All Europe All Europe C&E Europe C&E Europe All Europe All Europe C&E Europe C&E Europe US US Western Europe Western Europe Source: PwC Saratoga data Source: PwC Saratoga data 30 30 23.9% 23.9% 19.7% 20.6% 20.6% 20 20 19.7%18.3% US US 18.3% Key trends in human capital 7 Hours 2 Source: 2004 Report of Convergys Employee Care conducted by the University of Michigan and PwC Saratoga Hours UK UK Europe ern Europe
  9. 9. Human Resource Services PwC Saratoga Figure 5: Revenue per FTE 2003-2006 (€) Figure 6: Costs per FTE 2003-2006 (€) 000 60,000 300,000 300,000 200,000 200,000 000 50,000 250,000 250,000 160,000 160,000 000 40,000 200,000 200,000 120,000 120,000 000 30,000 150,000 150,000 80,000 80,000 000 20,000 100,000 100,000 40,000 40,000 000 10,000 50,000 50,000 0 0 0 0 0 0 2003 2003 2004 2004 2005 2005 2006 2006 2003 2003 2004 2004 2005 2005 2006 2006 2003 2003 2004 2004 2005 2005 2006 2006 US US UK UK All Europe Europe All UK UK All Europe Europe All C&E Europe US C&E Europe US C&E Europe US C&E Europe US Western Europe Western Europe Western Europe Western Europe Source: PwC Saratoga data Source: PwC Saratoga data Added-value performance trends incurring? How many people are we employing? How much are we investing in our reward PwC Saratoga uses a unique methodology, the 30 30 Human Capital Return on Investment (HC ROI), structures? And then critically, how can we improve each element of the ratio to improve to provide a comparative measure of added 23.9% 23.9% value per FTE. HC ROI compares the pre-tax our position against the competition? 19.7% 19.7% 20.6% 20.6% profit generated before employment costs, with PwC Saratoga’s 2006 report showed how 2004 20 18.3% 18.3% 20 the investment in compensation and benefit witnessed a higher performance in the ratio for costs. It is normally presented as follows:- Hours all regions other than the UK which remained Hours static on 1.11, with Western Europe on 1.14 and Revenue – Non-wage costs the US further ahead on 1.52. In 2005 the US 10 10 Number of FTEs x Average remuneration slowdown was reflected in a reduction in the This ratio states how much pre-tax profit ratio to 1.36 with C&E Europe moving to 1.23 or earnings are produced for every unit of and Western Europe recording 1.16. The value currency paid to an employee. In other words, added per FTE based upon the formula 0 50,000 60,000 60,000 70,000 70,000 0 0 for every unit of currency e.g. $, € or £ etc. continued to demonstrate a high differentiation paid to an employee, how much2005 is 2006 2003 2003 2004 2004 2005 2006 profit between the performances of the US and produced. The currency is therefore irrelevant Europe, with the US having a performance some and the ratio facilitates a cross comparison 17.2% above that of Europe. In 2006, Western between different commercial sectors, regions Europe demonstrated minimal improvement or nations. It is a key ratio for all HR executives, over its 2005 performance whilst the US since it covers all the major elements of their improved its own performance by 15.4%, potential contribution. How much revenue exceeding Europe by 34.2%. See figure 7. are we producing? How much cost are we China China na Czech RepublicRepublic Czech blic GermanyGermany 8 Key trends in human capital any India India Italy Italy dia
  10. 10. Human Resource Services Saratoga Figure 7: Human Capital ROI 2002-2006 % change % change % change 2002 2003 2004 2005 2006 02-06 04-05 05-06 Human Capital ROI UK 1.08 1.11 1.11 1.13 1.13 4.7% 1.8% 0.1% 7,000 C&E Europe 1.05 1.10 1.11 1.23 1.25 18.9% 10.8% 1.5% Banking 11.6% Western Europe 1.08 1.13 1.14 1.16 1.17 8.4% 1.8% 0.9% 6,000 Insurance 2.8% All Europe 1.07 1.13 1.14 1.16 1.17 9.4% 1.8% 0.9% Life & Pensions 1.5% 5,000 US Finance 5.1% 1.31 1.42 1.52 1.36 1.57 19.8% -10.5% 15.4% Chemicals Source: PwC Saratoga data 7.2% 4,000 Eng/Mfg 24.9% 3,000 With the & Electronics IT expected higher remuneration levels in 20.1% ability to respond rapidly to changing global Public Sector 2.9% the US (see figure 9) than anywhere in Europe, challenges and to adjust market offerings, 2,000 the superior & Leisure Retail performance of the 7.7% largely US is cost infrastructures and employment levels down to stronger levels of revenue generation to the demands of the time. It is a response Services 6.2% 1,000 combined with stringent control of people costs level which Western Europe has not matched. and numbers. These have been 5.8%term Telecoms long The growth of the new economies will test US advantages enjoyed by the US over its European Utilities 4.4% resilience but observers are already becoming 0 counterparts, due in part to its advanced aware of the US developing rapprochement 2003 progress in information and communication strategies of “collaboration to assess and technology, but also its more developed mitigate risk, and their advanced positioning UK competitive performance related culture. in integrating new organisational capabilities for managing geographically and culturally C&E Eu The key to the superior performance of the diverse organisations.” 3 US over a number of decades has been its Figure 8: Human Capital ROI 2002-2006 1.8 1.5 1.2 US 0.9 UK Western Europe 0.6 C&E Europe 0.3 All Europe 0 10,000 0.0 UK C&E Europe Western Europe All Europe US 2002 2003 2004 2005 2006 Source: PwC Saratoga data 3 Source PwC “Collaborate and Innovate: a new world of sourcing”, 2007 Key trends in human capital 9 80
  11. 11. 5,000 40,000 4,000 Human Resource Services 30,000 PwC Saratoga 3,000 20,000 2,000 1,000 10,000 0 0 2003 2004 2005 2006 2003 2004 2005 UK Western Europe US C&E Europe All Europe ‘High revenue growth Figure 9: Average remuneration per employee 2006 (€) accompanied by high remuneration US UK is a sustainable Western Europe success formula, C&E Europe providing revenues All Europe continue upwards’ 0 10,000 20,000 30,000 40,000 50,000 60,000 70,000 All Europe US Source: PwC Saratoga data 2005 2006 Productivity performance trends profits against total remuneration – in other words whether the employment costs are By using the metrics of Remuneration/Revenue actually producing profit for the organisation. and Remuneration/Total Costs, it is possible to Productivity metrics look at the relationship establish whether organisations are maintaining of employee remuneration (i.e. inputs) against a sustainable relationship and levels of the amount of revenue produced (outputs) competitiveness between their people costs and the relationship of those employee costs and the outputs they produce. Whereas China to the total costs of the business. added-value metrics demonstrate the relationship of profits to employee remuneration, Czech Republic The following table shows that in 2006, Western productivity metrics look at the relationship Europe held a 21.7% level, whilst C&E Europe Germany of remuneration to total revenues and costs. moved to 13.3%. Meanwhile the US moved PwC Saratoga looks at the added-value metrics upwards fromIndia in 2005 to 29.8% in 2006. 29.3% to measure the relationship between pre-tax Italy Japan Figure 10: Remuneration/revenue 2002-2006 (%) Turkey % change % change % change 2002 2003 2004 2005 2006 02-06 US 04-05 05-06 UK 24.7 23.9 24.1 24.0 25.0 South Korea 1.2% -0.4% 4.1% C&E Europe 17.5 15.1 14.6 12.7 13.3 Sweden -23.9% -13.0% 4.8% Western Europe 23.0 21.8 22.2 21.8 21.7 Argentina -5.5% -1.8% -0.3% All Europe 22.6 21.6 21.6 21.6 21.6 -4.3% 0.0% 0.1% South -0.2 0.0 0.2 0.4 0.6 0.8 ndia USItaly Japan Korea 24.1 Sweden 26.1 Turkey US 28.0 29.3 29.8 23.7% 4.6% 1.7% 020 2050 Source: PwC Saratoga data Banking Retail and leisure 10 Key trends in human capital Insurance
  12. 12. Human Resource Services Saratoga These remain critical metrics in any assessment Figure 11: GDP 2006 of human capital effectiveness. In a healthy economy it would be expected that GDP per GDP per Person Growth in GDP Growth in GDP remuneration would move either at a lower rate Hour (€) Employed (€) per Hour per Employed or similar rate as revenue growth for human Country 2006 2006 2005/06 2005/06 capital productivity to maintain impetus. Western Europe has been seen to be relatively Australia 22.33 34,042 1.76 2.47 successful at maintaining a stable relationship Austria 25.44 35,446 0.96 3.31 since 2002, whilst C&E Europe have been Belgium 27.34 33,284 1.64 3.17 successful in improving the Remuneration/ Canada 22.32 34,190 1.93 2.76 Revenue ratio even though rises in remuneration Cyprus 15.00 21,109 1.64 3.85 levels have been accelerating. The US has demonstrated a far higher relationship of Czech Republic 9.62 13,098 1.61 6.30 remuneration to revenue since 2002, but has Denmark 24.53 45,628 2.68 3.57 historically enjoyed far higher levels of revenue Estonia 17.50 12,248 5.46 11.19 growth. High revenue growth accompanied by Finland 23.34 35,930 1.71 5.00 high remuneration is a sustainable success France 28.58 32,626 1.10 1.99 formula, providing revenues continue upwards. However, if the US economy continues to slow, Germany 23.55 31,720 0.47 2.87 leading to lower revenue growth, a stronger Greece 15.53 25,608 1.30 4.38 control of remuneration levels will be essential. Hungary 10.50 10,848 0.43 3.89 Iceland 19.68 50,381 5.14 2.80 Commercial metrics Ireland 28.03 47,106 4.12 5.71 The common use of GDP per employee and Italy 23.18 28,309 0.90 1.87 GDP per hours worked as indicators of productivity on a national and regional basis Japan 20.49 27,218 0.92 2.19 correlate closely with our revenue per FTE and Latvia 12.11 9,461 4.30 11.93 costs per FTE metrics (see figure 5 and 6). PwC Lithuania 10.74 8,378 0.89 7.66 Saratoga measures both regional and national Luxembourg 29.25 81,827 5.95 6.17 financial performance, and can also benchmark Malta 15.41 12,839 0.65 3.15 performance across commercial and industrial sectors to give a more specific view of an Mexico 7.39 6,741 2.04 4.93 organisation relative to its nearest competitors. Netherlands 26.03 36,343 3.03 3.01 New Zealand 16.08 23,758 0.82 1.92 Norway 31.73 63,323 2.42 2.13 Poland 9.46 8,686 2.92 6.12 Portugal 13.80 16,532 1.04 1.28 Slovakia 12.85 10,582 1.63 8.27 Slovenia 16.20 17,663 1.19 5.72 South Korea 12.73 15,699 -0.81 4.99 Spain 17.34 25,177 3.74 3.86 Sweden 24.69 37,655 1.23 4.19 Switzerland 21.95 45,369 2.17 3.23 Turkey 10.49 5,238 1.17 6.09 UK 24.10 36,241 0.44 2.84 US 28.23 36,475 1.86 2.87 Source: The Conference Board and Groningen Growth and Development Centre, Total Economy Database, January 2008 Key trends in human capital 11
  13. 13. Human Resource Services PwC Saratoga Outsourcing and offshoring trends data from the PwC Saratoga database indicates that the proportion of total costs attributable The business rationale behind both outsourcing to outsourcing and offshoring grew from 2.7% and offshoring has changed significantly in in 2004 to 3.1% in 2006. recent years. Originally the drive for both initiatives was focussed upon the financial The Organisation for Economic Co-operation benefits arising from the opportunity created and Development (OECD) believes that as through exporting commoditised transactional many as 20% of all jobs in the US, Australia activities – either from the organisation or from and Canada in addition to the 15 pre-accession high-cost operational regions. In its 11th Global EU member states could be affected by the CEO Survey, PwC reports a marked shift in the international sourcing of labour by service motivation of CEOs to outsource or offshore industries. Perhaps even more significantly from simply “a mechanism to lower cost, Knowledge Process Offshoring (KPO) is to a means of achieving a more strategic, expected to grow significantly over the next few collaborative framework”. At the same time, years. KPO is the process whereby businesses CEOs report an increasing trend to expand the outsource high end knowledge or judgement scope of activity that is covered by outsourcing services such as, research, sales and marketing, arrangements, from the traditional component case writing and even animation design. supplies and IT infrastructure to other activities that, in the past, were held sacrosanct including Evalueserve predict that KPO will grow to HR management, R&D and even marketing and $16.7 billion in revenue by 2010 – 2011, sales. This willingness to allow normally tightly implying an annual growth rate of 39%, protected activities to migrate outside the employing some 390,000 professionals by company is a convincing signal of the degree March 2011. Interestingly the major reason to which the nature of outsourcing is changing. for this huge growth is the vast pool of educated and experienced professionals Furthermore, a new concept of “Connected available. Areas such as India, China, Russia, Sourcing” is emerging which primarily sees Poland, the Philippines, Hungary and many organisations focussing harder upon those republics from the former Soviet Union provide things they do best and then “orchestrating a high levels of skills at comparatively low portfolio of relationships” with third parties for cost, and fill critical skill gaps increasingly the rest. Collaboration with a range of external experienced by western economies.5 suppliers to provide solutions to complex issues will increasingly require higher levels of All the above factors have moved the “transparency, trustworthiness and reciprocity”.4 integration of services upwards. Increasingly, call centres in major corporates comprise Outsourcing is clearly a strategy that has been multi-disciplined teams, providing both widely accepted by global companies and that employees and customers with answers to acceptance is growing. According to a 2003 a cross-section of problems and introducing survey conducted by Forrester Research Inc., them to other services which are on offer. just 40% of Fortune 1,000 companies had either offshored or outsourced any business. However, areas of concern continue to exist. However, in 2006, a subsequent study They continue to include questions involving published by the India Institute of Management management control, service quality, depth (IIM) indicated that 55% of Fortune 1,000 of labour pools and customer service issues companies now sourced service activities caused by diversity of cultural values. from other countries. According to PwC’s 10th For example, India despite its high output of Global CEO Survey “this dramatic increase graduates per annum, still struggles to satisfy can mean only one thing, the global impact of its own and internal investors’ demands for outsourcing is rising and rising fast”. In addition, skilled resource. 4 Source: PwC “Collaborate and Innovate a new world of sourcing”, 2007 12 Key trends in human capital 5 Source: Evalueserve, the growth and future of Knowledge Process Offshoring industry, 2007
  14. 14. Human Resource Services Saratoga People – human capital – remain at the core of outsourcing/offshoring decisions. Access think are the biggest threats to business growth, CEOs regularly put the availability of key ‘Innovation is often to cohesive business processes may tempt organisations to move a functional activity skills at the top of the list. Thirty-four percent of all CEOs also say that poor management the first casualty of offshore, however, it is the relative cost of of human resources is a source of anxiety, integration. Due to labour and skills availability that are the overwhelmingly dominant factors. Both while 30% are concerned about conflicting workforce expectations. today’s competitive advantages are of course likely to reduce over time, as labour rates are pressurised upwards However, M&A activity moves an organisation deal environment, and skills become dispersed across the broad out of the sphere of business as usual. In fact, it is the ability of an organisation to adapt to CEOs are often forced business world. For the foreseeable future however, the advantages are clearly identifiable. change that concerns 75% of surveyed CEOs. to give away the value The requirement of success in future M&A work Few organisations have sufficient trust in demographic profiling to forsake opportunities will firstly be that the strategy is viable, but of the cost synergies that are likely to provide significant short-term more importantly, that the impetus of change and innovation is maintained. Barriers to of a merger in the bid’ performance advantages. change are clearly people related (see figure 12). Even the most common sense merger or Merger and acquisition trends acquisition in the business world will fail or at PwC’s 11th Global CEO Survey 2008, shows best disappoint, unless the people involved are around half of companies with $10 billion brought on board and managed as a key part of or more in revenues have completed a the process. There is clearly a vital role for HR cross-border M&A in the past 12 months. professionals to play in these transactions. Organisations are now balancing their efforts between ‘business as usual’ and integration Innovation is often the first casualty of activities. In the immediate future, hardened integration. Due to today’s competitive deal global business conditions may have a environment, CEOs are often forced to give reductive effect upon the number of deals away the value of the cost synergies of a and the extent of M&A activity. However, merger in the bid. Added value can therefore globalisation is almost certain to demand higher often only come from achieving future revenue levels of resource and structural consolidation, synergies. Some of these benefits may come leading to an inevitable explosion of activity from a widened product or customer base, in this business dimension in the years ahead. but a key driver of revenue growth will be In China, for example, employment matters innovation, which is highly dependent upon have traditionally taken a back seat in M&A people. The dilemma for top management is deals. However, the New Labour Contract that the rigorous discipline needed to deliver on Law introduced in January 2008 will ensure those already committed cost economies can these are given more form and substance to demotivate people and stifle the organisation’s enhance the legal protection of employees’ ability to innovate. In such circumstances, the rights and combat potential exploitation.6 retention and integration of identified talent is a critical success factor. No matter how astute It is now widely accepted that people and the merger or acquisition may be, the loss of cultural factors constitute major obstacles key talent following the completion of the deal to the realisation of value gain that any M&A has often proved to be disastrous, leaving only aims to achieve. More than 50% of the CEOs the existing product or service and its technical surveyed worry about handling cultural conflicts or structural alignment with the acquired or the and capturing the value of the deals they acquirer to produce value gain. undertake. In addition, when asked what they 6 Source: Providing Better Clarity, PwC, 2007 Key trends in human capital 13
  15. 15. Human Resource Services PwC Saratoga ‘CEOs say that Management stretch is an important aspect of talent management which may potentially stress, lack of clear direction, and burn-out), management of staff and resistance to it is difficult to find affect an organisation’s ability to successfully expand. As companies grow, the constraints change from employees. So often in post-deal environments, the focus of the people (whether people with the on human resources, specifically at the working in the deal team or impacted by the right combination management level, become tighter. CEOs say that it is difficult to find people with the right change) is on integration following the deal, rather than on the core strengths and growth of technical and combination of technical and commercial skills. Leaders and all-around performers targets of the business. Integration teams must consider and address these barriers early to commercial skills’ prove hardest to find, and senior or middle enable the delicate balance of business as management weaknesses are blamed most usual and a successful integration. This will often for hindering change programmes. help organisations prepare for continued In addition, the number of people who have innovation, retention of key talent, and the experience of doing deals is only about 10% development of a qualified management pool. of the management population. Organisations need to develop a pool of managers who are Key trend messages globally aware and have skills relevant for This section has dealt with financial performance dealing with the M&A environment, such as the through human capital metrics. It has focussed integration and technical skills to mitigate risks. attention upon a series of key metrics which As illustrated in figure 12, these barriers were will be useful to any organisation in an enviable identified as competing resources (which can “business as usual state”. It is also relevant to have a negative business impact caused by those seeking opportunities to globalise their operations and structures via outsourcing and offshoring actions, and those who will Figure 12: Top barriers to change increasingly become involved in M&A activity. Percentage of • The new economies of Asia and C&E Top 10 Barriers Europe are strongly challenging the mature companies economies of the US and Western Europe Competing resources 48% in the majority of markets. Furthermore, Functional boundaries 44% the BRIC economies, plus others such as Change skills 42% Indonesia, Mexico and Turkey will outstrip G7 by 2050. Middle management 38% • PwC Saratoga’s 2006 report stated that Long IT lead times 35% the US was in a better position in terms Communication 34% of Revenue/FTE and Profit/FTE compared with European competitors. This is still Employee opposition 33% true, however whilst the gap between both People issues 32% economies is reducing, it is still significant (Europe is being strengthened by new Initiative fatigue 32% entrants). Although the US may currently Unrealistic timetables 31% be experiencing a slow down, it is still able to respond more quickly to competitive Source: PwC survey focusing on large change projects in challenges than its European counterparts, 500 multinational and public sector companies covering all as stated in the previous section. industry sectors in North America, Europe and Asia. 14 Key trends in human capital
  16. 16. Human Resource Services Saratoga • In 2004, the UK’s HC ROI remained static at In such an environment, human capital 1.11, whereas C&E Europe and the US were practitioners will need to be comfortable with on the rise, with the US further ahead. In numbers, apply increasingly sophisticated 2005, economic slowdown in the US meant measurement to all human capital activity, the US HC ROI dropped and European HC forecast and assess the ROI of actions taken, ROI increased. However the gap between and concern themselves primarily with the US & Europe still remains. In 2006, there initiatives that have a direct impact on the was no improvement in Western Europe, bottom line performance of the organisation. whereas the US experienced a further If people are now recognised to be a key increase in HC ROI, further widening the gap. contributor to an organisation’s competitive • Although remuneration is extremely high performance, then human capital practitioners in the US, it has undergone stronger will need to be the initiators of change, advantages in terms of performance due seeking low cost solutions across the globe, to high revenue production and stringent establishing where appropriate skills and controls over people costs and numbers. talent are most available, incentivising people (third parties as well as employees) to work • The future competitive advantage the mature more effectively, and continuously encouraging economies should seek to exploit is in the constructive dissent with the status quo. realm of know-how, innovation and services. Existing policies which offer comfort and reassurance to established staff will need Human capital impact implications to be revisited where they no longer deliver It is apparent once again that the most the effectiveness to the sustainable business important challenge facing human capital model the organisation now requires. practitioners is the competitive positioning of their organisation. That competitive positioning is strongly influenced by its measurable productivity performance as it affects bottom line performance. It is the requirement to drive that performance continuously upwards that should dominate the human capital agenda. All human capital policies should be able to demonstrate their positive, measurable contribution to higher levels of people efficiency and effectiveness. The implications of all these impact issues are considerable. Structures and policies designed with agility in mind will need to be accommodated and addressed by HR functions. It becomes possible to imagine the vision of a network of people and organisations from varied cultural backgrounds, seeking diverse employment relationships, with often limited knowledge of, or even interest in, any identifiable parental corporate image. Key trends in human capital 15

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